Super Micro Computer's (NASDAQ:SMCI) stock is up by a considerable 52% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Super Micro Computer's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Super Micro Computer is:
24% = US$732m ÷ US$3.1b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.24 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Super Micro Computer's Earnings Growth And 24% ROE
Firstly, we acknowledge that Super Micro Computer has a significantly high ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. Under the circumstances, Super Micro Computer's considerable five year net income growth of 53% was to be expected.
Next, on comparing with the industry net income growth, we found that Super Micro Computer's growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Super Micro Computer's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Super Micro Computer Making Efficient Use Of Its Profits?
Super Micro Computer doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.
Conclusion
On the whole, we feel that Super Micro Computer's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.